Yum Brands to split China business

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Y um Brands, the restaurant company that owns KFC, Pizza Hut and Taco Bell, said on Tuesday that it intended to split off its Chinese operations into a separate company.

A string of mishaps in China have bedeviled Yum Brands over the last several years, most stemming from problems with its poultry suppliers.

The average sales of a KFC store in China are now $1.2 million, down from $1.7 million in 2012, the year the food-safety scandals started to surface. Yum recently replaced the longtime head of its Chinese operations, Sam Su.

Micky Pant, who was serving as chief executive of KFC, was assigned the task of turning around the China operations and now will head the spun-off company.

“Following the separation, each stand-alone company will be able to intensify focus on its distinct commercial priorities, allocate its own resources to meet the needs of its business, and pursue distinct capital structures and capital allocation strategies,” Greg Creed, the Yum Brands chief executive, said in a news release. “This will provide a clear investment thesis and visibility to attract a long-term investor base suited to each business.”

The separation is expected to be completed by the end of 2016, subject to regulatory approval and other conditions. As part of the changes, Yum Brands’ business in India will merge with the global divisions of KFC, Pizza Hut and Taco Bell in January 2016, the company said.

Investment analysts and investors had been pressing Yum for years about weakness in its China business. Pizza Hut, which felt little or no effect from the poultry-related issues that KFC faced there, also has not performed well, and Mr Creed has spent much of the time on conference calls with analysts answering questions about China.

More recently, analysts began calling for a breakup of Yum, either into three separate restaurant businesses or by shearing off its China operations. Keith Meister, an activist investor who was pushing for similar changes, was named to the Yum Brands board this month.

“With the transaction announced today, Yum is taking an important step in establishing the right corporate structure and capital structure to maximize long-term shareholder value,” Mr. Meister, the founder of Corvex Capital, said in a statement.

Jonathan Blum, a spokesman for Yum Brands, said the company retained Goldman Sachs and Wachtell, Lipton, Rosen & Katz about a year ago to offer advice on what its strategy should be. “This isn’t something we came up with all of a sudden in response to Wall Street,” he said.

He denied that Yum Brands was getting rid of a headache by splitting off its troubled Chinese business. “We’re bullish on it,” Mr Blum said. “We think it will come back.” Mr Creed, who became chief executive of Yum Brands at the beginning of this year, has spent most of his 20-year career at the company at Taco Bell, which under his leadership became the company’s workhorse.

Taco Bell has very little presence internationally, accounting for less than 5 percent of the division’s sales, according to Nomura Securities, and there are no Taco Bell stores in China. But Yum China, as the new Chinese company to be based in Shanghai will be known, will have the exclusive option to open Taco Bell stores there.

The new company will operate about 6,900 KFC and Pizza Hut restaurants with a combined revenue last year of $6.9 billion, which is more than the $6.3 billion in revenues generated by the rest of Yum Brands’ operations.

Yum Brands was one of the first American fast-food operators to enter the Chinese market, opening its first KFC store in 1987, about three years before McDonald’s opened its first location. Its stores there have worked hard to please local palates, offering menu items like rice porridge and egg tarts along with the fried chicken for which it is known.

Pizza Hut also offered rice dishes and a choice of unusual pizza toppings like crab roe, but its sales have also flagged in China, mimicking the woes of the chain in the United States. In 1995, Pizza Hut accounted for roughly a quarter of the limited service pizza business in the United States, but today accounts for 15.5 percent, according to the research firm Technomic. Domino’s Pizza has held steady and even slightly increased its market share over that period.

And while Pizza Hut remains the market leader despite its loss of share, KFC has been unseated by Chick-fil-A.

“I certainly hope this is the first step in the process, not the last step in the process,” Mark Kalinowski, an investment analyst at Nomura Securities, said of the decision to split off the China business. “I think there’s a lot of things the company needs to do for the benefit of its customers and its shareholders.”

Mr. Kalinowski said management had long placed a priority on the Chinese operations and now would be better able to focus on other issues.

Michael Schaefer, head of beverages and food service research at Euromonitor, said that as well as struggling with food safety issues in China, Yum Brands has had to contend with changing customer tastes and competition from local and international players that arrived on the scene more recently, such as Pizza Express.

[“source -business-standard”]

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